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UPS Traders Wager on Long-Term Resistance

Are UPS shareholders selling covered calls?

by 6/7/2012 11:00:02 AM
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Calls were the options of choice on United Parcel Service, Inc. (UPS - 75.82) on Wednesday, though some shareholders could be employing the options to emulate portfolio protection highlighted in a recent Reuters article. Specifically, the column noted how many market participants are establishing various forms of options "insurance" ahead of the Greek elections on June 17, and Biltmore Capital recently hedged its stake in globally exposed UPS by selling covered calls.

Speaking of covered calls... UPS saw roughly 14,000 calls cross the tape yesterday, more than doubling its average daily call volume. Most of the action centered on the out-of-the-money July 77.50 call, which saw more than 5,500 contracts change hands -- mostly at the bid price, suggesting they were sold. Plus, call open interest at the back-month strike ballooned by several thousand contracts overnight, underscoring our theory of sell-to-open activity.

If the aforementioned sold calls are, in fact, covered, the traders could be expecting stagnation or a modest pullback in the near term, but don't necessarily want to unload their shares of UPS. As such, the profit from the sold call -- which is capped at the initial premium received, and can be pocketed if the calls expire worthless -- helps to offset any mild portfolio losses. On the other hand, should UPS muscle north of $77.50 within the calls' lifetime, the shareholders would have to part with the stock for the strike price -- meaning they'd miss out on additional portfolio gains.

However, from a broader sentiment standpoint, it appears the options crowd has been employing UPS calls for more traditional reasons. Over the past 10 sessions on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a call/put volume ratio of 2.95, indicating that traders have bought to open nearly three calls for every put. What's more, this ratio ranks in the 78th annual percentile, hinting at a healthier-than-usual appetite for long calls over puts of late.

Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.69 indicates that calls outnumber puts among options slated to expire within three months. Furthermore, this ratio stands higher than just 25% of all others taken during the past year, implying that short-term options traders have been more call-heavy just one-quarter of the time.

Widening our sentiment scope even more, we find that options traders aren't the only group on UPS' bullish bandwagon. In fact, the stock currently boasts 14 "strong buys" and one "buy" rating, compared to six "holds" and not one "sell" suggestion.

Since tagging a multi-year peak of $81.79 in March, the shares of UPS have followed the broader equities market lower. Nevertheless, while the stock's dip was contained by long-term support from its 10-month and 20-month moving averages, it's now trading back below a familiar foe in the $76-$78 region. This area -- which coincides with the aforementioned covered call -- has rejected the bulk of UPS' advances since mid-2006, and could once again translate into a speed bump on the charts.

Monthly Chart of UPS since July 2006 With 10-Month and 20-Month Moving Averages

Should UPS stagnate beneath long-term resistance, or should the stock stutter in the face of worsening conditions across the pond, an unwinding of optimism on Wall Street could further hinder the shares in their quest to resume a longer-term uptrend.

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